Article reproduced from: Mankun Blockchain
According to DefiLlama data, 'the total market capitalization of stablecoins increased by 2.46% in the past week, now reported at 182.489 billion USD. Among them, the total market capitalization of USDT increased by 0.07%, now reported at 114.518 billion USD, with a market share of 69.82%.' The issuance of stablecoins has become an important growth point in the cryptocurrency market.
The EU's Markets in Crypto-Assets regulation (MiCA) is 'one of the most comprehensive digital asset regulatory frameworks to date.' Since the law came into effect, Coinbase announced it would delist USDT for European users by the end of the year, and other exchanges have taken similar actions. This article will outline the regulatory framework of MiCA for European stablecoin issuers, providing compliance references for businesses and individuals entering the European crypto market.
At Mankun Blockchain, we have already provided a basic introduction to MiCA (see: Interpretation of the EU MiCA Act, How to Comply with Virtual Currency Custody Services? | Mankun Web3 Legal Education).
It is worth noting that due to space limitations, we cannot cover all compliance provisions in the Act, but rather select important parts and provide preliminary explanations and analyses based on the literal meanings of the clauses, which may not fully reflect all the content of the regulations and are for reference only.
I. What are Stablecoins? Definitions and Classifications of MiCA
Stablecoins are cryptocurrencies that are pegged to assets such as fiat currencies, commodities, and cryptocurrencies, designed to leverage the advantages of cryptocurrencies while minimizing price volatility.
Currently, within the regulatory framework of the European Union (Markets in Crypto-Assets regulation, MiCA), stablecoins are mainly divided into Electronic Money Tokens (EMTs) and Asset-Referenced Tokens (ARTs).
EMTs refer to currencies that maintain stable value by pegging to one official currency. EMTs are similar to the 'embodiment' of fiat currency in the Web3 realm, comparable to a CBDC (central bank digital currency) that can be issued by non-state entities.
'Electronic money token' or 'e-money token' means a type of crypto-asset that purports to maintain a stable value by referencing the value of one official currency.
ARTs, like EMTs, aim to maintain stable value, but the paths to achieve this are different: it achieves this by pegging to multiple assets, which may include various currencies, rights, etc.
'Asset-referenced token' means a type of crypto-asset that is not an electronic money token and that purports to maintain a stable value by referencing another value or right or a combination thereof, including one or more official currencies.
This structure theoretically disperses risk, but due to the diversification of underlying assets, it requires relatively stricter supervision. Compared to traditional fiat currencies, which are pegged to gold or backed by government credit, ARTs adopt a more flexible approach similar to a 'portfolio,' allowing for risk diversification through various configurations of underlying assets, as well as the option to stabilize with a specific asset. It can be said that ARTs provide more choices for the design and innovation of stablecoins.
II. Overview of Regulatory Key Points for Stablecoin Issuers
The main content of the MiCA Act lies in the issuance and trading rules for the two types of stablecoins: ARTs and EMTs. Among them, Articles 16-47 (a total of 31 articles) are regulations for ARTs, while Articles 48-58 (a total of 10 articles) are regulations for EMTs. For the more diverse ARTs, MiCA's regulations are more detailed. For brevity, we will focus on the key points regarding ARTs, specifying when we emphasize ARTs or EMTs separately; if we refer to 'stablecoins,' it includes both ARTs and EMTs. According to the provisions of each chapter of MiCA, the more significant compliance points are four, which are:
1. Authorization to offer asset-referenced tokens to the public and to seek their admission to trading
2. Obligations of issuers of asset-referenced tokens
3. Regulatory Reserves of Stablecoin Issuers
4. Identification of 'Significant' Stablecoins
III. Seeking Authorization for Public Issuance and Trading of ARTs
Qualification Access
Regarding the issuance of ARTs, no one may publicly issue ARTs in the EU or seek approval for trading unless such person is authorized as an issuer of ARTs, and:
a) Establishing a legal entity or other enterprises approved through statutory procedures and authorized by the competent authority of its member state within the alliance; and
b) Credit institutions that comply with the provisions of Article 17.
Cryptocurrency white papers
The white paper for stablecoins (EMTs/ARTs) should include all of the following information:
1. Information about the issuer of the e-money token/asset-referenced tokens
2. Information about the e-money token/asset-referenced tokens
3. Information about the offer to the public of the e-money token/asset-referenced tokens or its admission to trading
4. Information on the rights and obligations attached to the e-money token/asset-referenced tokens;
5. Information on the underlying technology
6. Information on the risks
7. Information on the reserve of assets
8. Information on the principal adverse impacts on the climate and other environment-related adverse impacts of the consensus mechanism used to issue the e-money token/asset-referenced tokens.
The provisions for ARTs and EMTs overlap on points 1-6 and point 8, but regarding point 6 about information on asset reserves, ARTs have such provisions while EMTs do not, indicating that MiCA has higher requirements for the asset reserves of ARTs.
In addition, stablecoin issuers should publish the approved cryptocurrency white paper on their website, and as long as someone holds that cryptocurrency, the stablecoin issuer should continuously disclose it on the website.
Finally, if the content of the white paper is incomplete, unfair, or unclear, or misleading, the stablecoin issuer shall bear legal responsibility.
In summary, the disclosure of cryptocurrency white papers is crucial to safeguarding investors' right to be informed. Stablecoin issuers should pay special attention to the completeness and accuracy of information disclosure to avoid unnecessary regulatory risks.
IV. Obligations of Stablecoin Issuers
By passing the first gate and obtaining authorization, the issuer gains access to issue stablecoins in the EU, but this does not mean everything is smooth sailing; issuers must still be vigilant. The MiCA Act immediately has the following provisions regarding the obligations of ARTs issuers:
1. Obligation to act honestly, fairly and professionally in the best interest of the holders of asset-referenced tokens: This obligation is mainly a principled guide, though abstract, it provides guidance on the issuer's subjective purpose in acting.
2. Marketing communications: Any marketing communication related to stablecoin transactions should be clear, explicit, and consistent with the crypto asset. MiCA has quite strict requirements for the issuance and statements of stablecoins, aiming to avoid inflammatory and tempting statements, controlling speculative risks from the source.
3. Ongoing information to holders of asset-referenced tokens: The stablecoin issuer must provide ongoing disclosures at least once a month. Disclosures related to stablecoin issuance are not one-time but ongoing, and issuers must ensure that information about issuance is continuously known to regulators and stakeholders such as investors.
4. Complaints-handling procedures: Stablecoin issuers should establish and maintain effective and transparent procedures to swiftly, fairly, and consistently handle received complaints. Stablecoin issuers should establish a complete internal mechanism for handling and feedback on complaints, focusing on resolving conflicts internally within the platform.
5. Identification, prevention, management, and disclosure of conflicts of interest: Stablecoin issuers should implement and maintain effective policies and procedures to identify, prevent, manage, and disclose conflicts of interest among themselves.
6. Governance arrangements: Stablecoin issuers should have sound governance arrangements, including a clear organizational structure, explicit, transparent, and consistent responsibilities, effective procedures for identifying, managing, monitoring, and reporting risks they face or may face, as well as appropriate internal control mechanisms, including sound administrative and accounting procedures.
7. Own funds requirements: Stablecoin issuers must always have funds equivalent to the highest amount of the following: (a) 350,000 Euros; (b) 2% of the average amount of reserve assets referred to in Article 36; (c) one-quarter of the fixed management costs from the previous year. Stablecoin issuers also need to maintain a certain 'reserve fund' to address potential risks during the issuance and trading of virtual currency.
From the above provisions, it can be seen that MiCA imposes relatively comprehensive obligations on stablecoin issuers, especially in terms of disclosure (ongoing disclosure) and communication (marketing communication), indicating that MiCA aims to prevent fraud, speculation, and other risks from the source, safeguarding the interests of stablecoin holders; on the other hand, these regulations also impose higher compliance requirements on stablecoin issuers.
V. Asset Reserves of Stablecoin Issuers
From the obligations of stablecoin issuers, we can see that MiCA imposes high requirements on issuers' own funds, and MiCA has separately listed a chapter to describe the asset reserves of stablecoin issuers (Reserve of assets), key points are summarized as follows:
1. Obligation to have a reserve of assets, and composition and management of such reserve of assets: Stablecoin issuers should maintain reserve assets 'at all times.' It is especially noteworthy that the reserve assets should be legally segregated from the issuer's assets to ensure that once the stablecoin issuer is unable to repay its related debts, creditors have no right to reclaim the reserve assets. This provision requires stablecoin issuers to achieve asset segregation, and to minimize this risk, issuers need to carefully consider the legal structure of their assets.
2. Custody of reserve assets: The stablecoin issuer should establish and maintain custody policies for reserve assets to avoid the risk of excessive concentration of reserve assets.
3. Investment of the reserve of assets: If stablecoin issuers wish to invest part of the reserve assets, they may only invest those assets in highly liquid financial instruments that minimize market risk, credit risk, and concentration risk. They should avoid exposing reserve assets to unnecessary risks for higher returns.
4. Right of redemption: Stablecoin holders should have the right to redeem reserve assets at any time, and this right requires issuers to establish a comprehensive policy for this permanent redemption right.
5. Prohibition of granting interest: Issuers of EMTs are prohibited from granting interest related to EMTs, including compensation, discounts, etc.
Specific provisions for EMTs
Regarding the issuance and redemption of EMTs, MiCA stipulates that EMT issuers should issue at par value upon receipt of funds, and this is not reflected in the regulation of ARTs.
VI. Identification of Significant Stablecoins
In addition to general stablecoins, MiCA also defines 'significant' stablecoins, and stablecoin issuers should pay special attention to the potential additional regulatory requirements that 'significant' stablecoins may entail.
If the issued stablecoin (ARTs/EMTs) meets at least the following three criteria during the reporting period, it may be recognized as 'significant' and subject to additional regulatory requirements:
The number of stablecoin holders exceeds 10 million;
The value of the issued stablecoins, their market capitalization, or the asset reserve scale of the stablecoin issuer exceeds 5,000,000,000 Euros;
During the relevant period, the average daily trading volume and average total value of this stablecoin exceeded 2.5 million transactions and 500 million Euros, respectively;
The issuer of stablecoins is designated as a core platform service provider as a gatekeeper according to the European Parliament and Council (EU) 2022/1925 Regulation;
The significance of the activities of stablecoin issuers on an international scale, including the use of stablecoins for payments and remittances;
The interconnection between stablecoins or their issuers and the financial system;
The same issuer issues at least one additional stablecoin and provides at least one cryptocurrency service.
If a stablecoin is deemed 'significant,' the supervisory authority will impose additional regulatory requirements on the stablecoin, such as an independent audit every six months from the date the EMTs are recognized as 'significant.' In addition, there are extra regulatory requirements like fund supervision and reporting obligations.
According to MiCA, in addition to being passively recognized as 'significant,' EMT issuers can also apply for their issued virtual currency to be recognized as 'significant.'
In summary, stablecoin issuers should not only pay attention to general regulatory requirements but also be particularly mindful of the identification standards for 'significant' stablecoins. Once the issued stablecoin is recognized as 'significant,' MiCA will impose higher regulatory requirements on the stablecoin issuer.
VII. Quantoz: Case of European Stablecoin Issuers
According to Bloomberg, Arnoud Star Busmann, CEO of the Dutch blockchain company Quantoz Payments, stated in an interview that Quantoz Payments will launch tokens pegged to the Euro and USD, and the company has been authorized by the Dutch central bank as an electronic money issuer. This lays a compliant foundation for its future market expansion.
Currently, 'Circle's EURC and Société Générale's EURCV account for 67% of the Euro stablecoin market, while Quantoz's EURQ is attempting to carve out its own niche.' This move not only showcases Quantoz's market ambitions but also reflects the efforts of emerging crypto companies to seek compliant development and innovative breakthroughs under the MiCA regulatory framework.
In the Euro stablecoin market, Circle and Société Générale have established a strong market advantage, accounting for over half of the market share. In this context, Quantoz must seek a differentiation strategy to break through in a market dominated by giants.
With the gradual implementation of the MiCA regulatory framework, the compliance threshold for the stablecoin market is continuously rising, which has profound implications for the existing market landscape. On one hand, emerging issuers like Quantoz, who actively embrace regulation, are rapidly rising; on the other hand, many established stablecoin issuers that fail to meet MiCA compliance requirements are gradually contracting or even exiting the market. This trend indicates that the future stablecoin market will be dominated by issuers who excel in compliance, transparency, and risk management.
Conclusion
This article focuses on the regulatory provisions of MiCA concerning ARTs, summarizing the compliance points that European stablecoin issuers face in terms of authorization, obligations, reserves, and 'significance.' Due to space limitations, the article cannot cover all aspects, aiming instead to provide directional guidance for stablecoin issuers. For any businesses or individuals planning to issue stablecoins in Europe, compliance is always the best way to manage the risks of virtual currency operations. In addition to enhancing their own compliance awareness and paying attention to risk prevention, consulting compliance experts or lawyers is also an important way to mitigate the risks of stablecoin issuance.